SWISS NATIONAL BANK ANNOUNCES POLICY RATE TO REPLACE LIBOR / THE FINANCIAL TIMES

Swiss National Bank announces policy rate to replace Libor

Central bank will now seek to influence rates in secured overnight money market

Adam Samson and Sarah Provan in London


Switzerland’s central bank has announced a policy rate to replace one based on Libor as part of a global shift away from the scandal-hit benchmark.

The central bank’s focus will turn from the three-month London Interbank Offered Rate to the Swiss average rate overnight, or Saron, which was jointly developed by the SNB and the Swiss stock exchange.

Saron differs from Libor in that it is calculated using completed transactions and trade quotes in the secured money market, according to the SNB. These are transactions in which the borrower must put up collateral. Libor, by comparison, is based on non-binding prices in the unsecured money market reported by a panel of a dozen banks.

The move comes as the financial industry is shifting to other benchmarks to replace Libor in products such as floating-rate bonds after rate-rigging scandals tarnished its reputation.

“The reason for this adjustment is that the future of the Libor is not guaranteed,” Thomas Jordan, chairman of the SNB governing board, said in prepared remarks for a news conference on Thursday, adding that the “volume of money market transactions underlying the Libor has dwindled”.

“This has also placed a question mark over the basis for its calculation,” he said. “Given that our monetary policy is focused on the medium term, we are already adjusting our strategy at this juncture.”

Other countries have also drawn up similar overnight reference rates meant to replace Libor. The UK has drawn up the sterling overnight interbank average rate (Sonia) while the US has the secured overnight financing rate (Sofr).

Mr Jordan said the shift to the SNB policy rate from three-month Libor did not entail any change in its current monetary policy or its expansionary stance, adding that, at present, three-month Libor and Saron were virtually “on a par”.

The SNB on Thursday kept on hold its highly stimulative monetary policy, leaving the interest on deposits held by banks at the SNB at minus 0.75 per cent.

“Given that the SNB last changed its monetary policy settings way back in early 2015, its announcement this morning that it has maintained the status quo again certainly took nobody by surprise,” said David Oxley, economist at Capital Economics.

The European Central Bank last week left its benchmark rate at a record low, and promised to keep it there until at least the middle of next year. This has placed pressure on the SNB to either hold or maintain its rate, lest it risk an appreciation in the Swiss franc.

“The recent shift to a looser bias in the US and the eurozone only strengthens our view that Swiss rates will be cut further into negative territory, possibly as soon as early 2020,” said Mr Oxley.

The Swiss franc rose 0.25 per cent against the dollaron Thursday, with $1 buying 99.29 Swiss centimes, while €1 would buy SFr1.1208.